We’ve seen this before. A new CEO with limited China experience introduces himself to the international business community with tough
talk and big promises about China and the rest of Asia. Then reality rears its ugly head.
The new US administration is doing what new US senior managers in China do best – sending conflicting messages, missing opportunities, and making sweeping pronouncements that are just about impossible to implement.
What can we expect moving forward?
Expect to watch the needle swing back and forth between Partner and Competitor pretty sharply for a while yet as the new trade bosses find their footing. Here are the potential flashpoints you should be watching.
Intellectual property protection
Tariffs or “border adjustments”
Christianity in China
Yes, the Taiwan card has been played, but you can expect to see it massively overplayed at least once again in the near future. The present administration has probably forgotten the Taiwan call & tweet , and is hoping that the tough talk on North Korea will amount to little more than a photo-op. And that’s your problem(s).
China bears and the Chinapologists are spreading myths that lead to terrible business decisions. The truth lies somewhere between these two extreme – and dangerous viewpoints.
Last week we talked about China realities. The ultimate conclusion was that while the Chinese business environment isn’t fair, it’s still the best game in town in terms of growth and opportunity. As a China negotiator and decision-maker, you have to decide early – go all in or get completely out for good. China is a terrible place for half-measures.
Two types of China myths. China bear and Chinapologists.
Chinapologists are the China experts who support and spread the orthodox China party line. You can usually spot them because they tend to preface every statement with, “I’m not supporting the Chinese party line but…” and then they proceed to do so. When a Chinese person does this it’s pretty easy to spot them as either 50 Cent Army (paid posters on online chat and BBS sites, who are alleged paid half a mao – or fifty cents – for each pro-government entry) or direct beneficiaries of Chinese policy. It has become common for Westerners living in China for a long time or hoping to curry favor with bureaucrats or officials to actively defend Chinese policies that many Westerners consider unfair or discriminatory. Sometimes these Chinapologists feel they are winning points with decision-makers who will soon repay the favor; sometimes they got to this position via a slippery slope of defending elements of Chinese business or society that they genuinely believe in- but ended up completely in the China camp; and sometimes they are merely mouthing politically correct positions in public while take a much more realistic stance in private or with paying customers. However they may have come to act as apologists for the Chinese bureaucracy, their arguments usually fall into one of three main categories:
China Business Reality Check – It’s not fair and isn’t getting better. Deal with it.
For Westerners, doing business in China is
going through anther sea change — so this is a good time to take a fresh look at the operating environment as it impacts on international management decisions.
1) The business environment in China isn’t fair to Westerners.
2) China is one of the top two economies in the World by just about any standard.
3) Negotiating and operating successfully in China will probably get tougher before it gets easier.
1) Chinese government / CCP policies give an automatic edge to all Chinese businesses compared to Western operations.
2) Western companies can’t make money in China.
3) China is about to go bust / will quickly see how much it needs Western good will.
1) China is more capitalist than any other economy at any time.
2) Chinese companies have it just as tough if not tougher than Western firms.
3) The situation is worse in the West / the situation is improving in China.
Let’s look at each one of these in a little more detail.
Reality #1: China isn’t fair to Western businesses. It just isn’t. Let’s accept it and move on. Western companies pay more, take longer, have fewer options, and are more likely to be prosecuted/penalized than local firms. Now, here’s the business point you have to take away from this – it doesn’t matter if there are good historical, cultural, or political reasons; it doesn’t matter if Chinese firms are treated just as badly or worse when they go abroad; and it doesn’t matter if Western firms used to get preferential treatment, so today’s unfair treatment is somehow “fair” in some obscure way. That’s all just academic theory or babyish whining. Man-up and play to win. All that matters is that you, as an international manager, are going to be held to the letter of the law and will always face slower, more stringent treatment from the bureaucracy. You know it, you have time to plan for it, and you have to deal with it. Literally. You have to structure your business plans and negotiating strategy to compensate for harsher, unequal treatment from bureaucratic authorities. Stop trying to cut corners or assume you can get local treatment. If you are getting advice from locals, make sure you are have some kind of filter i’n place to make sure they understand the ‘Xpat Factor’. You aren’t in Kansas anymore, so stop managing or structuring deals as though you were.
Guanxi-building gifts, premium pricing for prestige brands, and closely guarded trade secrets used to be the hallmarks of a savvy international management team in China – now they are prosecutable offenses.
Glaxo SmithKline. Mercedes Benz. Yum. McDonalds. The list of Fortune 100 MNCs getting into high-profile legal trouble in China has been growing – and the
severity of problems growing more intense than ever. With the conviction of a well-known Western consultant and the widespread deployment of China’s Anti Monopoly Law, even the most die-hard Chinapologists are having a hard time arguing that international firms are getting fair treatment from Beijing. In the past the biggest problem facing Western managers and negotiators in China was the lack of consistent laws – now the problem is too much law and uneven enforcement.
In Chinese negotiation, don’t confuse polite rhetoric with concerted strategy.
American and European negotiators treat their Chinese counterparties’ “general principles” discussion like the “terms and conditions” screen – we just check the box and look for the real content. Big mistake.
General Principles Discussion can come back to haunt careless negotiators
Westerners in China often make important concessions without even knowing it. It’s common for Chinese negotiators to frame their position with a discussion of “general principles”. Westerners tend to shrug them off with vague agreement – particularly since these conversations tend to be phrased in vague, wooden rhetoric like “harmony and shared responsibility”. It all sounds like meaningless propaganda to us, and it mixes easily with the toasts, proverbs, unfamiliar historic references and folksy anecdotes that characterize a boozy banquet night in Shanghai or Beijing. Western negotiators tend to focus on transactions, and aggressive negotiators will make every effort to control the negotiating agenda and nail down concrete deal points – but the Chinese side never gives up on their deal points or general goals, regardless of the appearance of compromise or concession.
Relationship Building Not a One-Off Activity in China
In ChinaSolved’s latest book, “10 Common China Negotiating Mistakes”, 3 on the least wanted is “coasting on good starts and early successes”. While this is one of the biggest dangers that deep-pocketed MNCs (and their representatives” face in a long-term China business, it can be very hard to anticipate. Fortunately for us (but unfortunately for them), Microsoft provides a telling case study of how the best efforts don’t always yield successful outcomes.
Miscrosoft 8 Banned from Government Computers in a Surprise Announcement
According to every Yiddish speaking grandmother in the world, there are two kinds of fools – schlemiels and schlimazels The schlemiel walks into a busy restaurant and bangs smack into a waiter carrying a tray of hot soup, dumping it all onto a customer sitting nearby. The schlimazel is the guy that gets dumped on.
The story reminded me of a recent encounter I had at prestigious NYC networking event. I was introduced to a young professional woman from Beijing who was hired right out of Columbia Business School by a prominent private banking firm. She was well-educated, well-traveled, and well connected – both in NY and Beijing. I asked about the outlook for inbound Chinese investment into US hi-tech and agri-business industries . She responded with vague anti-government complaints that private investors were willing but Washington was blocking their efforts. For a moment I was hit with that jarring feeling you get when you experience something familiar in an unexpected place – like running into an old acquaintance while travelling in a strange city.
Doing business in China was once characterized by low costs, steep learning curves and a lack of best practices. No more. Nowadays, China is expensive in terms of funds, personnel AND opportunity cost. Still, if your business requires a global marketing footprint or relies on supply-chain efficiency, you may need to have some kind of China presence.
Lack of basic business intelligence is the #1 risk facing Western negotiators in China.
Alibaba is grabbing headlines again for breaking new ground – again. This week it’s a record setting IPO in NY (bigger than Facebook) — though it’s newly announced deal with ShopRunner may turn out to be even more significant in the medium-term.
Just to restate the obvious, Alibaba is already involved in a very large equity cross-holding deal with Yahoo and one of their major investors is Softbank. The company has been around for 15 years, and for most of that time their iconic founder Jack Ma has been shuttling around the world, raising funds, making deals, and speaking at international A-list conferences. Alibaba started out as an international B2B platform whose raison d’etre was to match Chinese sellers with international buyers. Nowadays it is China’s most distinctive brand, responsible for selling or moving roughly half of every online transaction in China (which the World Bank just ranked as the world’s largest economy).